Sonic Automotive (SAH) Could Be a Great Choice

All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. But when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Based in Charlotte, Sonic Automotive (SAH) is in the Retail-Wholesale sector, and so far this year, shares have seen a price change of 29.36%. The auto dealer is currently shelling out a dividend of $0.41 per share, with a dividend yield of 2.05%. This compares to the Automotive - Retail and Whole Sales industry's yield of 0.75% and the S&P 500's yield of 1.3%.

Looking at dividend growth, the company's current annualized dividend of $1.64 is up 12.3% from last year. Over the last 5 years, Sonic Automotive has increased its dividend 5 times on a year-over-year basis for an average annual increase of 33.71%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Sonic Automotive's current payout ratio is 26%, meaning it paid out 26% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for SAH for this fiscal year. The Zacks Consensus Estimate for 2026 is $6.95 per share, representing a year-over-year earnings growth rate of 5.30%.

From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers a quarterly payout.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, SAH is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of #3 (Hold).

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This article originally published on Zacks Investment Research (zacks.com).

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